Total Car Wrecks Arbitration

ROANOKE, Virginia – A judge denied Total Car Care’s attempt to dismiss a lawsuit brought by a former franchisee of its Colors on Parade franchise system and instead require him to arbitrate, because of the franchisor’s poorly drafted arbitration clause.

“The question before the court is not whether the process for selecting the arbitrators is fair, but rather whether the parties agreed to arbitrate the dispute at all,” U.S. District Judge James C. Turk wrote in this opinion.

At the heart of the case are two issues. First, is the fact that franchisee Devin Hamden signed a non-compete clause as part of his 15-year franchise agreement in 1996. Under the heading Termination, Non-renewal or Expiration, the contract stated that he could not open or operate for two years any other paint restoration location or mobile unit, in competition with Total Car. Hamden argued in part that he never did paint restoration, only dent repair and removal.

The second issue pertains to the non-solicit, non-compete agreement Hamden signed. It specifically stated that if the contract is terminated before its expiration date, Hamden agreed for two years he could not compete against Colors on Parade in the same or similar appearance technologies in a paint restoration location or mobile unit. Hamden argues that his contract expired, and that he never terminated before the expiration date.

Although the franchise agreement expired in May 2011, Hamden continued operating as a franchisee until November 30, 2011. At that time, he notified his franchisor that he would not be continuing with the franchise. On December 1, 2011, Total Car Care acknowledged his request, agreeing that Hamden would cease operations as a franchise owner.

But when Hamden notified the franchisor that he intended to open his own car restoration business, no longer being bound by the franchise agreement or the non-compete agreement, Total Car disagreed with his interpretation of the franchise contract. Company officials informed him they would take immediate legal action to prevent him from doing so.

Hamden beat the franchisor to the punch and filed a lawsuit against the car restoration firm on January 3, 2012.

Judge’s analysis

In determining Total Car’s motion to dismiss the lawsuit and compel arbitration, Judge Turk weighed two issues. First, whether the arbitration clause and the non-compete agreement compelled arbitration; and second, whether the lawsuit should be dismissed if the court rules that arbitration should be compelled.

Hamden responded to Total Car’s motion arguing that the franchise agreement does not include an agreement to arbitrate, and even if it did, it had expired. The franchisee stated that the arbitration agreement does not include provisions for non-compete.

In view of Total Car’s motion and Hamden’s response, the judge first addressed the issue of whether the parties agreed to arbitrate the dispute over Hamden starting his own independent business when bound by the two-year non-compete clause. After citing case law, including the Supreme Court’s reasoning that “any doubt concerning the scope of arbitrable issues should be resolved in favor of arbitration,” the judge examined the franchise agreement. He said he had to determine if the dispute resolution clause intended to cover the dispute between franchisee and the franchisor.

Interpreting the franchise agreement

Judge Turk cites three steps that must be taken in the event of a dispute between the parties, according to section 12 of the agreement. First, they enter into direct communication with one another; two, if unsuccessful, they pursue mediation; and three, if no resolution occurs, the franchisee and franchisor enter binding arbitration.

With the process outlined in the contract, Hamden argued that Total Car’s arbitration was not intended to govern disputes between franchisee and franchisor, but inter-office disputes. To support his position, the franchisee cited O’Neal v Total Car Franchising Corp, which held that arbitration provisions did not compel arbitration in a non-compete breach of contract case. The franchisor rejected that argument because the Louisiana decision placed undue emphasis on the fact that the franchisor could assist in the selection of the arbitrators and serve as a case administrator.

Judge Turk disagreed.

Because of its drafting of the language in the franchise agreement, Total is considered the “we” and/or “us” and is not intended to be a party to the dispute. The franchisor also used “You agree to abide by this procedure” rather than “we” indicating that Total did not intend to be bound by the provision. Judge Turk said the company serves as a case administrator and is seen as a neutral party, rather than a disputant.

Lessons learned from decision

Matthew Kreutzer of Armstrong Teasdale LLP recently wrote about the court decision in Hamden v Total Car Franchising Corp. He emphasized to franchisors the importance of careful drafting of franchise agreements and, in particular, dispute resolution provisions. In refusing to dismiss the lawsuit and compel arbitration, the judge relied heavily on the language of the arbitration clause, he cautioned.

Kreutzer said franchisors can learn two principal lessons from this case. First, it is important to ensure that your franchise contract is drafted carefully, and that all internal references are correct. Second, if the franchise agreement uses the terms "us," "we," and "our," to refer to the franchise company and "you" or "your" to refer to the franchisee, it is particularly important to ensure that each use of the personal identifiers is within the proper context as determined by a reading of the entire provision or agreement. “Double- and triple-checking by several people is always a good idea,” the attorney stressed.

About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.